We were recently asked about the implications of a ‘dividend waiver’ and so thought it warranted an article, should it be something you are wondering about.
Whilst they can be useful, and used legitimately in certain situations, there are also a few hazards to be aware of. It’s important that you fully understand the risks associated with waiving your rights, before doing so, and that you have considered the alternatives.
What is a dividend waiver?
Shareholders in a company can choose to receive income in the form of dividends, which should be declared from retained profits. The amount of the dividend is determined by a pre-agreed pence per share rate, and the number of shares held.
A dividend waiver refers to a shareholder ‘waiving’ their entitlement to receive a share of the company’s profits for a specified period (most commonly, a financial year).
The waiver itself is a formal, legally binding document that must be drafted by an appropriate professional, signed, dated and witnessed accordingly.
Why would I want to waive my rights to a dividend?
Perhaps the most obvious motivations for wanting to waive your entitlement to be paid dividends, is feeling that you are in a position such that you don’t need the money, being of the opinion that the company would be better off for retaining the profits, or indeed you may be concerned about tax inefficiency.
What are the traps associated with dividend waivers?
Consideration should be given to the pitfalls associated with dividend waivers. The fact of the matter is that, in most cases, HM Revenue & Customs (HMRC) would rather you exercise your entitlement, as opposed to waiving it.
Settlements legislation
It’s possible that your dividend waiver could be caught under HMRC’s settlements legislation, particularly if you and your spouse are both shareholders in the company and other factors indicate to HMRC that the legislation should apply.
HMRC may take the view that you are attempting to divert your own income, to another shareholder, in order that it is taxed at a lower rate for example.
Now say that, in addition, were you not to have waived your rights the company would not have been in a position to pay out all shareholder’s dividends and that there is also a record of multiple waivers having been entered into previously; this will without doubt make you more susceptible to challenge by HMRC as the board must be certain that adequate profits are available for distribution, regardless of the expectation of a waiver.
Failure to satisfy this requirement would be deemed an unlawful distribution and they may be held personally liable, it therefore recommended that the minutes of the board meeting where the dividend is approved clearly states that the directors have reviewed the financial standing of the company prior to recommending a distribution.
Where it deems that there is a significant tax advantage to be gained by the waiving shareholder, HMRC may decide to assess the non-waiving shareholder’s income as if it were the income of the shareholder giving up their rights.
Reasoning
If there is a specific commercial reason for wanting to waive your entitlement to a dividend, state this clearly within the deed to mitigate the need for HMRC to try and determine your motivation.
Frequency of waiver
If used at all, waivers should be entered into sparingly; frequent use of waivers could lead to HMRC wanting to take a closer look at your arrangements.
It is also worth bearing in mind that short-term waivers are invariably better than long-term waivers, for protecting the value of your shareholding.
Is there an alternative to a dividend waiver?
Shareholders in a company may well find themselves in very different financial positions, and so a good idea would be to try and accommodate this by implementing different dividend strategies, but care must be taken not to fall foul of the aforementioned settlement legislation and so professional advice is strongly recommended.
Alphabet shares, for example, allow for a different class of share to be created for each shareholder; these shares can then be assigned distinctive rights and, of course, a specific dividend. It is essential that the company’s Memorandum and Articles of Association permit this.
How can George Hay help?
Our team of chartered accountants and business advisers, operating from offices in Cambridgeshire, Bedfordshire and Hertfordshire, can help you to identify the most appropriate dividend strategy for your company.
Having the right dividend strategy in place will afford you flexibility to distribute dividends in line with current rules, but also in the most tax-efficient way possible.
If, however, you decide that a dividend waiver is appropriate given the circumstances, we can support you to ensure you always remain compliant and that you do not inadvertently expose yourself to unnecessary HMRC scrutiny.
To find out more about how we can work with you, in your best interests, contact us.
